More than half of Australian SMEs have more than $10,000 in outstanding debt on their books and experts say a failure to move quickly to recover amounts owed can have a significant impact on whether or not businesses end up receiving their cash.
A study of 600 small businesses by Prushka Fast Debt Recovery has found Australian small business owners are worried about the future profitability of their businesses, with half of those surveyed citing profitability as a top concern.
Fifty-seven percent of businesses surveyed report they have more than $10,000 in outstanding debt, although the survey did not distinguish between amounts owed to small businesses and amounts they may have borrowed.
However, the same survey found 63% of businesses wait more than 90 days before referring debts owed to them to a collection agency.
The scale of the problem doesn’t surprise Healthy Business Finances founder Stacey Price, who says too often businesses don’t have systems in place for chasing money owed. She sees too many simply believing their clients will come through in the end.
“I think people feel guilty for chasing money, even if they’ve done the work,” Price says.
“I think the big thing is that people just assume that people will pay, then they don’t chase it until it’s 30 days beyond the deadline. You’re already looking at 60 days before they make contact [if there are 30 day payment terms],” she says.
This can cause significant problems for a business because if they don’t act fast enough, they may suddenly realise that despite having work on the books, they don’t have cash rolling in, says Price.
“Because you have clients, does not mean you have the cash. We often find people worry about it too late,” she says.
Late payments to SMEs, and the effect these have on the profitability of businesses and mental health of business owners, have been in the spotlight over the past three months after the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) launched a self-directed enquiry into payment times across the nation.
Ombudsman Kate Carnell has discussed the flow-on effects of late payments at length over the course of the inquiry, and is expected to hand down her report into the area in coming weeks.
Preliminary results from the inquiry revealed the time and effort small business owners pour into chasing unpaid invoices.
According to the ABSFEO, 40% of Australian businesses spend between two and five hours a week chasing money owed to them.
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The Ombudsman’s estimates are that two out of three businesses are owed at least $10,000, while one in 10 have reported they are owed between $100,000 and $500,000.
Carnell has previously told SmartCompany that placing scrutiny on payment times, especially from big businesses that owe smaller players money, could have a significant impact on changing the everyday lives of business owners.
“Through all my consultation I’ve found that if there’s one thing that would change lives for SMEs, that would be being paid quicker,” Carnell said in November last year.
“If money doesn’t come in at the same time it goes out, all it takes is one bad week or bad month to really cause a problem.”
Take the time to understand why others are not paying
Price says while there are stories out there of small businesses showing up on people’s doorsteps demanding payment, a much easier option is to ditch email and call someone up to try to understand why they’re not paying.
“I think a lot of people would be too scared to do that,” she says of the in-person confrontation.
“I don’t mind the theory of it, but I wouldn’t go straight to that option without picking up the phone. That person might be in hospital, there might be a death in the family. If you just show up on the door, you haven’t taken the time to understand why they haven’t been paying.”
There’s a lot of guilt around the idea of accepting up-front payments instead of sending invoices after work has been completed, Price says, but for some businesses the idea of an up-front payment or deposit could lesson the impact of slow or no payments down the line.
“Accepting up-front payments would deter a lot of cashflow issues,” she says.
“Think about it — you go to Safeway, you don’t walk out with milk without paying [with a plan to pay later]. Deposits are something else people can consider that will lessen the impact.”